FAQ Guide to Compensation Collection & Reporting for International Assignment Program Administrators

The actual payroll process for international assignees is much more complicated than for domestic employees. Not only does an international assignee receive additional allowances in the form of cash or benefits-in-kind, but some of these allowances are likely to be delivered to the assignee in the Host country. Moving expenses and lease payments paid directly to the landlord may be paid through the Home or Host country accounts payable department or paid by the relocation management company (RMC). The Home country payroll department may not be aware of all these payments, but the program administrator should be.

Typically, the program administrator establishes a process to make sure that worldwide compensation data is collected and reviewed on a regular (e.g., monthly, quarterly) basis from the Host country. This information may be collected from the Host country payroll, finance, and/or human resources departments as well as the RMC. The data is reviewed by the program administrator to confirm it is complete and accurate before giving it to payroll to update the employee’s W-2. Thus, payroll supports—but is not responsible for—administering the international assignment program.

Another area of confusion for payroll is assignment length. Whether or not an allowance is taxable depends on the nature of the international assignment. The program administrator must notify the payroll department of the length of each assignment and of any changes that affect the taxability of compensation items. For example, while moving expenses are not deductible in the US for tax years 2018-2025 under US domestic rules, a short-term assignee coming to the US from a treaty country may be able to claim a treaty position whereby the employer-funded moving costs are not subject to US taxation. Depending on the wording of the relevant treaty clause, this may be the case where the assignee is present in the US for no more than 183 during the year (or period specified by the treaty), and all costs of remuneration are borne by the Home country entity.

The program administrator is often responsible for establishing and maintaining the infrastructure, policies, and procedures for a well-run international assignment program. Written policies and procedures are a basic requirement of an international assignment program. The policies and procedures should be distributed to, and discussed with, the Home and Host country payroll, finance, and human resources departments. International assignment payroll issues are unique and complex, requiring ongoing communications. Quarterly meetings with the Home country payroll department to review and discuss international assignment policies, procedures, and issues will help ensure a successful program.

There are many reasons that foreign allowances should be reported as income in periods other than just at year-end (i.e., calendar or fiscal). The first is that from a payroll compliance perspective, income paid to or on behalf of an employee is required to be reported in the period that the item is paid to or on behalf of the employee. This reporting is required so the employee and the employer pay their required income and social taxes at the correct time.

Upon examination, a payroll auditor could determine the company has reported the correct earnings, but the taxes were remitted in an incorrect quarter. By under-reporting in a particular quarter, the company is exposed to penalties and interest in one quarter and a refund in a different quarter. While the tax would be the same, the assessment of penalties and interest for the under-reporting in a quarter would likely not be recovered.

Another benefit to collecting foreign allowance information on a more frequent basis is the ability to review what is being paid on behalf of the assignee. Misunderstandings about what expenses the company will be responsible for versus the assignee can be resolved sooner rather than later. Asking an assignee to repay amounts incorrectly paid on their behalf more than a year after they receive the original benefit can be tricky at best.

Year-end is always a busy time. By collecting foreign allowance information on a more regular basis (e.g., monthly), the amount of year-end work is reduced. It is also easier to resolve discrepancies since finding what was paid last month is more efficient than trying to find something that happened a year ago. It is also important to consider the fact that non-US locations may have a fiscal rather than a calendar year-end as well as different reporting requirements—a more frequent review of allowances would support these foreign reporting and withholding needs.

As with many international assignment issues, a decision needs to be made regarding the risk the company is willing to take in deciding what pay period to report the foreign assignment allowance income. You should consider reviewing this with your corporate tax department and mobility tax provider.

Automated tools to collect this information are limited and can be expensive. If your international assignment population is large, you may be able to justify the cost of one of these automated systems. Otherwise, the collection of assignment location payments is often done via a standard spreadsheet (e.g., using a secure portal). The spreadsheet can be collected in either Home or Host country currency. The spreadsheet should be clearly marked as to what currency is utilized so that it can easily be determined if any exchange rate conversion needs to be done to facilitate tax reporting.

Benefits that are frequently provided in the assignment location should be individually identified by compensation component. For example, there may always be a column in the spreadsheet for assignment location taxes, housing, automobiles, education, etc. Be sure to include a section for all other payments that allows room for descriptions so a review of the taxability of the "other" payments can be made. The valuation and taxability of items may vary under Home and Host country tax rules.

If you have an international location where the person responsible for accumulating the payment detail is not responsive, consider asking your finance department for support to collect this information. Including the reporting of international assignment payments in the monthly financial statement closing process provides visibility for the international assignment program and places accountability on the person responsible for accumulating the information.

Monthly collection can be the most time efficient method of gathering the international assignment allowance payments. It is easier to accumulate the payments shortly after the expenditure rather than a year after the fact.

Let's begin by defining "cutoff date." A cutoff date is an end date for including various items in annual compensation reporting. The “technically correct” cutoff date for US compensation reporting is December 31. However, many companies select a cutoff date prior to December 31 as a practical solution to meeting the year-end payroll deadlines in Home and Host locations.

Note: We are not talking about the reporting of salary or other items regularly delivered through the payroll process. We are reviewing the reporting of other noncash assignment benefits paid on behalf of the international assignee by accounts payable that are not a part of the regular payroll process.

From a practical perspective, collecting items paid for by accounts payable in the last month of the year-end reporting period is difficult. Using a calendar year tax-reporting period as an example, it is almost impossible to include the items paid in December in the December year-end reports. This can especially be a problem if you outsource payroll. Payroll service companies generally have a set date they stop accepting data for inclusion in the year-end reports so they can complete the annual reports in a timely manner.

A common practice is to set an earlier cutoff date for accumulating data that is to be included in the annual compensation reports. For example, when processing domestic relocations, employees who move in November and December have their taxable relocation reported in the next year's compensation. The delayed reporting often applies to taxable relocation items reimbursed via expense report or directly billed to the company. Note the IRS does allow this type of cut-off only for certain non-cash fringe benefits. As such, this practical approach is often not technically correct, unless the reporting cut-off date is also used as a cut-off date from the actual expense reimbursements.

Using a cutoff date of October 31 or November 30 for international assignees in calendar year locations may make sense for your program. This allows you time to collect the data paid in the Host locations and review it prior to inclusion in the year-end payroll. The review process allows you to identify items that are being paid inappropriately as well as to locate items that you know were paid but have not yet been reported to you. However, careful implementation and consideration of payroll risks is required. You should review with both your payroll and tax departments the use of a cutoff date other than December 31 prior to implementing this practice.

When an employee is sent on an international assignment, most companies keep the assignee as an employee of the Home country company. The Home country employer retains substantial control over the assignee, including the right to hire or fire. As an employee of the Home country company, the assignee remains on the Home country payroll system. This assures the assignee's continued participation in the Home country benefits plans.

Paying the assignee from their Home country provides funds in Home country currency to pay ongoing obligations such as a home mortgage. The assignee may also need funds in Host country currency. To accommodate this need, the employer may deliver a portion of the base salary and allowances in Host country currency. Thus, the payroll delivery is "split" into two currencies. The assignee is paid partially from the Home country payroll and partially from the Host country payroll. Split payroll is simply a payroll delivery mechanism.

Reasons why a company would utilize a split payroll:

• Allow employees to continue to contribute to their Home country social tax and retirement programs.
• Protect the employee from currency rate fluctuations. If the cost-of-living allowance (COLA) is delivered in Host country currency, the employee is protected from fluctuations in exchange rates.
• Decrease the need to frequently adjust COLA, if paid in Host country currency. Small currency rate fluctuations would not necessitate a change in COLA.
• Lessen the assignee's frustration relating to the international transfer of money. Wire transfers are expensive and often difficult for an individual, though recently introduced FinTech apps have greatly simplified assignees’ ability to transfer funds cross-border quickly and cheaply.
• Increase tax planning opportunities, where available. Delivering assignment allowances in a tax effective manner can, in certain instances, reduce the Host country tax liability.
• Facilitate Home and Host country tax payments.

Split payroll does have its disadvantages.

• It is complex to administer.
• Controlling and maintaining payroll delivery can be extremely difficult without written policies and procedures.
• Gathering the allowances paid in the Host country for Home country payroll reporting can be daunting.

Nonetheless, many companies find that split payroll is more satisfactory to their international assignees and can be cost effective for the company.

Generally anything paid to or on behalf of an international assignee for the performance of services is taxable to the individual as income. Imputed income is a benefit delivered in kind (a non-cash payment) to the individual for the performance of services. Examples of imputed income include personal use of a company automobile, rent-free accommodations in company housing, employer provided tax preparation services, and country club dues.

An individual is usually taxable on the value of non-cash payments as imputed income or earnings unless otherwise exempted by law. Imputed income treatment applies to benefits delivered in either the Home or Host location.

Why is it necessary to report imputed income in the assignee’s W-2?

Imputed income is taxable to the assignee (unless specifically exempt). Because it is delivered for the performance of services (related to employment), it must be included in the assignee's Form W-2 to accurately reflect the assignee's taxable wage-related income.

While certain items are considered imputed income for US income tax purposes, they are not necessarily taxable in the same manner in other countries. For example, in some countries a rent-free housing benefit is not taxed at all, or only a portion of the fair value of the benefit is taxable.

Per diem allowances are frequently provided to employees to reimburse them for certain expenses incurred while temporarily away from home (one year or less) on a work assignment.

Whether the per diem payments are reported in the W-2 as income depends on several factors including:

• If the employee meets the IRS requirements to be considered temporarily away from his/her tax home (i.e., to be away from the general area of your tax home for a period substantially longer than an ordinary day’s work AND to require sleep or rest to meet the demands of work while away from home for a period of up to one year – IRS Publication 463).
• If the employee incurs deductible expenses while performing services as an employee (which may occur even if the employee doesn’t work on that day).
• If the employee adequately accounts to the employer for the expenses within a reasonable period of time (i.e., within 60 days of incurring the expense – IRS Publication 535).
• If any excess reimbursements are returned to the employer within a reasonable period of time (i.e., within 120 days of incurring the expense – IRS Publication 535).

Impact to the employee:

• If all conditions above are met, the employer may be able to exclude the per diem amounts from the employee’s wages.
• If any of the conditions above are not met, the employer must include the per diem amounts in the employee's wages.
• If the per diem is required to be included in the W-2, the per diem would also be subject to income and social tax withholding.

Impact to the employer:

• Expenses that qualify to be excluded from an employee’s W-2 can be claimed as a business deduction as allowed under the rules for deducting travel, and meals and entertainment expenses.
• Expenses that do not qualify to be excluded from an employee’s W-2 can still be claimed as a business deduction, but under the rules for employee compensation.

Hopefully, you've been collecting Host country payroll information on a regular (i.e., monthly, quarterly) basis for each of your long-term international assignees. Now is the time to do a final review of the Host country payroll information to make sure that:

• All prior discrepancies have been resolved.
• All Host country compensation payments have been collected.
• Host country tax payments are correct, with no duplication of prior year's reporting.
• State wages are shown properly (for assignees who will break state tax residency during their international assignment, it will be especially important to review and consider whether all wages reported for US federal purposes are also reportable for state purposes).

In cooperation with your Home country payroll department, prepare each assignee's compensation summary. Review the summary to ensure that:

• Home country base salary and assignment allowances are correct.
• Hypothetical tax and any tax equalization settlements have been properly reported.
• There is no duplication of allowances between Host and Home country payroll.
• The compensation summary total agrees with the W-2.
• Host and Home country tax payments are correctly listed.
• Any gross ups of tax paid by the company (e.g., Medicare tax on relocation payments) are itemized for consideration in the tax equalization calculation.

Send each assignee a copy of their compensation summary. Often, the compensation summary is included with the W-2. Sending the summary with the W-2 helps the assignee understand the components included in the W-2 and why the wages shown on the W-2 are so large.

Don't forget year-end payroll for the assignees' Host country taxes! Who is responsible for providing the year's compensation to the Host country? And to whom is the information sent? Compensation reporting becomes particularly confusing when dealing with Host countries having a fiscal year-end that is different from the Home country year-end. As a part of the Host country payroll process, be sure to confirm the differences in the taxability of Home and Host employee benefits such as 401(k) plans, company cars, etc. This will assist with the Host country tax preparation process.

On a yearly basis, written procedures should be discussed with, confirmed by, and distributed to, everyone involved, including Home and Host country payroll, human resources, and accounts receivable departments as well as your company's tax service providers.